What Is At Stake For Real Estate With Trump’s ‘Big Six’ Tax Proposal?

A debate over how much America’s wealthiest households should pay in taxes has emerged as one of the key sticking points in the negotiations between the White House and Republicans on Capitol Hill over rewriting the nation’s tax code. The White House has been pushing to lower the top individual tax rate from 39.6 percent to 35 percent.

Trump said earlier this month while in Florida surveying damage from Hurricane Irma. “This is to benefit the middle class and to benefit companies, where they’re going to be producing jobs.” but Treasury Secretary Steven Mnuchin told CNBC in November that there would be no “absolute tax cut” for the rich under the administration’s proposal. During congressional hearings, lawmakers even dubbed the statement the “Mnuchin rule.”

The framework is not a complete piece of legislation. Key aspects of it, including what the corporate tax rate and the top individual income tax rate will be, are not yet determined.

What the Republican tax framework says

• The seven current individual income tax brackets will be consolidated to three: 12, 25, and 35 percent. The framework also specifies that Congress can add a fourth bracket above 35 percent, for the purpose of ensuring the new tax code is “at least as progressive as the current system and doesn’t shift the burden from higher-income to lower-income households.”
• The standard deduction will be raised to $24,000 for couples and $12,000 for individuals, a near doubling from current levels.
• The child tax credit, currently $1,000, will grow to an unspecified higher level. It will also be expanded to more high-income households; it currently phases out at $75,000 in income for single parents and $110,000 for married couples.
• The personal exemption (currently offering households $4,050 per person in deductions) is eliminated, replaced by the higher child credit and standard deduction.
• Mortgage interest and charitable deductions would remain but almost all other tax deductions would go, including the deduction for state and local taxes. Retirement incentives like 401(k) and IRA provisions, as well as the exclusion for health care, would remain.
• The corporate income tax rate will be lowered from 35 percent to 20 percent.
• The corporate tax will be “territorial”: Foreign income by US companies will be tax-free, and all untaxed income currently held oversees will be immediately taxed at a fixed rate. This one-time tax will have different rates for money held in cash (or bonds, stock, etc.) and for money invested abroad in harder-to-sell assets like factories.
• Instead of having companies “depreciate” investments by deducting them over several years, companies could immediate expense all their investments. This benefit would last at least five years but might go away after that.
• Companies would face a limit on how much debt they can deduct from their taxable income, a significant change for highly leveraged companies like banks.
• “Pass-through” companies would pay a lower 25 percent rate rather than the top individual rate.
• Two big existing credits for corporations — the Research & Development tax credit and the Low Income Housing Credit — won’t be repealed.
• The Alternative Minimum Tax, which increases taxes for certain affluent or upper-middle-class households, is repealed.
• The estate and gift tax, the most progressive component of the federal tax code, only paid by extremely rich estates, is abolished.

What is still not known:

The bill still leaves a huge amount unspecified. They also fail to say:

• Where the individual bracket thresholds are: e.g., when the 12 percent bracket stops and 25 percent begins.
• If there will be a fourth tax rate for rich people with $410,000 or more in taxable income (the current group paying a 39.6 percent marginal rate), and if so, what it will be.
• What the child tax credit will be increased to, or whether it will be expanded to more low-income families who are currently ineligible.
• Which corporate tax breaks will be closed, beyond taxing more interest on corporate debt.
• How the plan will avoid having companies relocate operations to generate foreign income, which will now be exempt from US taxes; zero specifics.
• How much interest deductibility will be limited
• How long full expensing of investments will be allowed

And then there are the two big questions about any tax reform effort: How much will this cost, and who will it help or hurt?